Efficient Frontier
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Efficient Frontier

The United Stablecoins

Welcome back to Efficient Frontier’s biweekly newsletter! We hope you enjoy our update on the Federal Reserve’s “Stablecoin mania” and our birds-eye Bitcoin market wrap

Published February 12th on Substack

Stabelcoin mania at the Federal Reserve

Why is this story important despite not being as big as NFTs or as cutting edge as DeFi?

1. CBDCs and other digital fiat will have an essential role in how the cryptocurrency universe will tie into the fiat world

2. The rise of a strongly centralized CBDC (Central Bank Digital Currency) for one of the major fiat currencies may be a massive competitor to Bitcoin and other open systems, as we’ve seen in China — where the government clamped down on Bitcoin leading up to the expected premiering of the digital RMB.

Google search trends over the last 5 years for CBDC, stablecoin, NFT and Bitcoin

Recent events

November 2021 — US Treasury publishes a report on stablecoins

January 20, 2022 — Federal Reserve publishes a report on digital money and CBDC

January 31, 2022 — Federal Reserve publishes report on Stablecoins. Facebook’s stablecoin project, Diem, was sold to Silvergate

February 1, 2022 — India’s central bank announced it will issue a digital rupee in 2022 or 2023

February 15, 2022 — US Senate hearing on Stablecoins will take place

Conclusion

According to the Fed’s new report on CBDC’s it does not intend to create a centrally controlled dollar anytime soon, writing they will not “proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorising law” and only with “broad public and cross-governmental support”.

The report was low on details and serves mostly as an invitation to a discussion, though it mentioned that “well-designed and appropriately regulated stablecoins could potentially support faster, more efficient, and more inclusive payment” and that “these forms of non-bank money could cause a shift in deposits away from banks even without a CBDC”.

Stablecoin volatility during Bitcoin and Ethereum crashes. Source: The Federal Reserve

With skyrocketing stablecoin activity, which has even caught the imagination of detractors of cryptocurrency, a much more detailed report from the Fed on Stablecoins, and a hearing next week, open-source stablecoin dollar seems meant for mass adoption while the centralized digital dollar is on hold.

In contrast, the report by the Federal Reserve on stablecoins published last week goes into much greater detail and sets an informative ground to the hearing on the subject next Tuesday.

Another interesting direction hinted at by both documents is that the American CBDC will serve only banks, while regulated stablecoins will be provided by in the second tier to the bank to the customers.

Caption: Stablecoin supply has reached $145 billion this week. On-chain volume of stablecoins was $542 billion in January.

Bitcoin Market Wrap

On January 28th we wrote “sentiment doesn’t have much lower to go” — this time we got it right and since then, Bitcoin’s price grew mostly at a steady pace from $37,000 to a high of $45,300. There were also two highly volatile days: February 2nd which saw a $2,000 drop, and February 3rd with a $4,000 rise to $41,780.

Right now the price of Bitcoin is $42,520 and sentiment, according to Alternativ’s Bitcoins fear & greed index, has recovered to 50/100.

Bitcoin Fear & Greed index VS Bitcoin price. Orange: January 23rd. The YTD high being 93 and low 8. Source: CoinGlass

The Bitcoin derivatives traders are still bearish. Today’s $17.32 billion in futures contracts held a low to neutral funding rate of 0.00085, 6 times lower than on December 26th, the last time Bitcoin was traded for over $50,000.

Binance, which is dominating the Bitcoin derivatives market with 30% of all open interest, currently is reporting that traders are ever so slightly more long than short. This follows two weeks where the majority of Binance traders were betting on the short side — a rare occasion.

Above: Binance long/short ratio by account below Bitcoin’s price. Green — traders are long, Red- most traders are short

Ark’s $1 million Per-Bitcoin and other bizarre activity

The last weeks were charged with unique news only the crypto world could produce- from the colourful couple arrested for laundering $3.6 billion in Bitfinex’s stolen Bitcoin, the massive $320 million DeFi hack, and the ENS DAO cancellation scandal, to Tezos blockchain, the ICO which raised $220 million in 2017, becoming an official sponsor of the world famous Manchester United football club.

But Bitcoin was not left behind. In their recent research report, Ark projected a possible $1 million price per-Bitcoin by 2030. If all goes well…

News & links

  1. $53 million in Ethereum raised for Julian Assange’s legal defence fund
  2. China and Russia pledge to build financial trade network independent from dollar system
  3. First ever metaverse mortgage used to sell a virtual house
  4. Meta (formerly Facebook) joins the Crypto Open Patent Alliance
  5. Canadian protestors raise 21 Bitcoins after GoFundMe suspension
  6. Microsoft is hiring a cryptocurrency Director of Business Development

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With over 12 years of high frequency and algorithmic trading experience, our technology powers weekly over $1 Billion of trade. We’re passionate about digital assets and our mission is to bring professional, trusted technology that adds value to the industry and the markets.

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